investment and industrial policy: a perspective on the future · mckinsey & company 6 used...

Panel Discussion | October 1, 2018

Investment and Industrial Policy:

A Perspective on the Future

UNCTAD TRADE AND DEVELOPMENT BOARD, SIXTY-FIFTH SESSION

CONFIDENTIAL AND PROPRIETARY

Any use of this material without specific permission of McKinsey & Company is strictly prohibited

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Contents

New era of global flows

New opportunities for economic growth

New world of policy challenges

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26

2423 22 22 22 22

23

26

30

35

51

39 39

37 3737

35

27

1980

24

3

30

10

35

28

12

34

6

1990

3

31

23

31

20102000

2931

39

43

46

2007

4

2017

28

18

3 35

3

5

3

17

3 4

9

5

13

6 6

25

22

20

10 10

33

11

21

26

8

2829

25

28

33

9

27

After 20 years of rapid growth, traditional flows

of goods, services, and finance have declined relative to GDP

-16 p.p.

Flows of goods, services, and finance, 1980–2017, $ trillion, current

Finance

Service

Goods

All flows as

% of GDP

FDI, 1980–2017, $ trillion, current

SOURCE: UNCTAD; IMF Balance of Payments; World Bank; McKinsey Global Institute analysis

0,5

4,12,3 1,7 1,4 1,6 2,0 2,7 3,3

2,3 2,0 2,1 2,1 2,1 1,9 1,72,6 2,5 1,8

01 1502 03

1.4

1604

1.3

0905 06 07 08

1.9

10 1211 13 14

0.7

2017

1.4

0.6

90

1.5

0.1

1980

1.4

0.2

0.81.2

0.60.9

1.9

1.41.6 1.6 1.4

0.9

2000

1.9

FDIFDI as % of GDP

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However, at the same time,

the world has entered the new era of digital globalization

SOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

1980 109085 150595 2000 2020

Trade

Finance

Data

Flow dynamics, relative to the year of peak value in 1980–20171

1 Finance = 2007 ($12.2 trillion), Trade = 2013 ($23.5 trillion), Data = 2017 (estimated 543 terabits per second of cross-border bandwidth used)

Cross-border data

flows expected to

grow 3.5x by 2021

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Globalization: Then vs. Now

5McKinsey & CompanySOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

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Used cross-border bandwidth

Cross-border data flows are surging and connecting more countries

NOTE: Lines represent interregional bandwidth (e.g., between Europe and Africa), but exclude intraregional cross-border bandwidth (e.g., connecting European nations with one another).

2005

100% = 4.7 Terabits per second (Tbps)

NA

United States and Canada

LA

Latin America

AF

Africa

EU

Europe

ME

Middle East

OC

Oceania

AS

Asia

Regions

Bandwidth

Gigabits per second (Gbps)<50 50–100 100–500 500–1,000 1,000–5,000 5,000–20,000 >20,000

2014

100% = 211.3 Tbps45x larger

NA

EU

LA

ME

AF

AS

OC

NA

EU

LA

ME

AF

AS

OC

SOURCE: TeleGeography, Global Internet Geography; McKinsey Global Institute analysis

7McKinsey & Company 7McKinsey & CompanySOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

Digital technologies are changing how business is done

across borders and broadening participation

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Contents




9McKinsey & Company 9McKinsey & CompanySOURCE: McKinsey Global Institute’s “Digital Globalization: The New Era of Global Flows”

How globalization increases GDP

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Digitization is transforming business models

in ways that enable more cross-border activity

Cross-border implications of digitization

Flow type

Data Goods Services Finance FDI

Remote

monitoring

Remote tracking

Remote maintenance

Supply-chain

management

Remote inventory management

Supplier management

Access to

global

markets

Cross-border access to customers

Cross-border access to labor

Cross-border access to finance

Business

operations

and strategy

Centralized back-office operations

Cross-border digital payments

Real-time communications and collaboration

Data sharing and analytics-driven decision making

SOURCE: McKinsey Global Institute analysis


Global flows account for approximately 10 percent of global GDP output;

data flows account for a large (arguably largest) chunk of that contribution

3,5

10,1

3,0

2,0

1,6FDI

Migration2

Goods trade

Data flows

All flows

Impact on

GDP, 20171

$ trillion

Long-term impact on level of GDP1

%


NOTE: Numbers may not sum due to rounding.

1 Includes inflows and outflows data for 139 countries in MGI Global Flows model.

2 Global migration flows declined slightly from 2003 to 2013, resulting in a positive impact despite a negative coefficient. Migration flows are negligible or slightly negative at the global level,

possibly due to the loss of skilled labor in developing countries or the difficulties of absorbing a large influx of refugees or migrants. However, migration flows have a positive impact on

productivity in advanced economies.

Accounting for secondary effects of data flows – in that they enable trade flows, FDI, and even people flows –

the impact of cross-border data flows on global GDP surpasses the impact of global goods trade


The MGI Connectedness Index1 shows that advanced economies

are generally more connected than developing countries

50

0

45

30

70

40

55

5

60

50 60

35

30

0

10

25

7020 80

65

15

14010 40

20

Singapore (#6)

France (#4)

Canada

(#18)

Kuwait

Italy

Netherlands (#1)

United States

(#7)

Belgium (#8)

Japan

South Korea

China (#38)

India

Russia (#25)

Mexico

Australia

Per capita GDP, 2014$ thousand, purchasing power parity, current international dollar

Turkey

Indonesia

Austria

Norway

Connectedness score, 2014(Number in brackets represents the rank on the data connectedness sub-index2)

Czech Republic Finland

(#10)

DenmarkQatar

Switzerland (#13)

Portugal

Greece

UkraineSweden (#5)

United

Kingdom

(#3)

Spain

(#16)

Germany (#2)

Ireland (#9)

United Arab Emirates (#46)

Saudi Arabia (#53)

Emerging Developed

Correlation coefficient (r) = 0.54

Size of circle represents

$ value of flows in 2014

VietnamBrazil

ThailandMalaysia

SOURCE: IMF; McKinsey Global Institute analysis

1 The McKinsey Global Institute Connectedness Index measures the connectedness of 131 countries

across all five flows of goods, services, finance, people, and data and communication;

he index reflects the level of inflows and outflows of all types of flows adjusted for country size

2 Listed for the top 15 countries by MGI connectedness score and for top 10 countries based on data connectedness sub-index (where not overlapping)


Limited participation in global flows by many countries has had a real

economic cost; going forward countries at the periphery of the world’s

digital networks stand to gain even more than those at the center


Output gap

% of GDP

>75

51–75

26–50

1–25

<1

No data

▪ While participation in global flows is not the

panacea for the other factors that may dampen a

country’s economic growth1, our analysis suggests

some countries may grow their GDP in the

long-term by over 50% by participating fully

in global flows

▪ Over time, participation in data flows will grow

in importance vs. traditional flows

▪ Unlike with traditional flows, countries on the

periphery of the global network of flows

have the most to gain from increasing

cross-border data flows

▪ Countries benefit from receiving cross-border digital

flows as well as producing them; in other words,

countries do not need to transform

themselves into digital content or platform

producers to benefit from data flows

1 For example, uncompetitive business environment, weak rule of law, corruption


Contents





Policy-makers need a clear agenda to capture the full potential of global flows


1. Think strategically about the role the country can play in global value chains

2. Address policy and administrative barriers that hinder global flows

3. Address the dislocations

4. Invest in human capital

5. Build the necessary physical infrastructure and close the digital divide

6. Create a strong business and institutional environment for the digital economy to thrive

7. Maintain an open Internet while protecting privacy

8. Make cybersecurity a top priority

Key enablers for digitalization specifically

Can data flows and ‘Digital’ economy be the enablers for some countries

to leapfrog in development, like they have been for tech businesses recently?


BACKUP


The outlook also appears more challenged than a year ago

SOURCE: UNCTAD; Economic Conditions Snapshot, McKinsey Global Survey, September 2018; team analysis

Decline in the value of announced FDI projects Deteriorating outlook of overall economic conditions


Data flows and traditional flows paint different pictures of the world

SOURCE: : UNCTAD; TeleGeography, Global Internet Geography; Pingdom; McKinsey Global Institute analysis

NOTE: Data omitted for some small nations as indicated in gray

China, the United States, or Germany is

the major trading partner for most countries

Largest trading partner in goods, 2014

The US is the largest producer of digital content

for Internet users across the globe

88

66

56

51

36

10

16

32

17

61

18

12

32

2US and Canada

Latin America

Africa

Asia Pacific

3Europe

Location of top 100 websites requested by users

% by user region, as of April 2015

42

31

12

15

100% =

1 million

websites

United States1 Europe Asia Pacific Other

Hosting location of top

1 million websites, 20132

%

1 Includes United States and Canada for location of top 100 websites requested by users

2 Based on Pingdom analysis of Alexa top 1 million websites


66

21

13

63

23

14

65

22

13

62

23

14

79

17

4

79

16

5

86

112

77

16

7

Flows remain concentrated among a few leading countries,

however data flows show more broadening of scope than others

% of world total

Global goods flow distribution

2005 2014

Global services flow distribution

2005 2014

Global FDI flow distribution

2005 2014

Global data flow distribution

2005 2014

Top 15 countries Next 20 countries All others

$10.6

trillion

$19.0

trillion

$2.5

trillion

$4.9

trillion

$1.39

trillion

$1.63

trillion

4.8

Tbps1

211

Tbps1

NOTE: Numbers may not sum due to rounding

SOURCE: : UNCTAD; IMF; TeleGeography, Global Internet Geography; McKinsey Global Institute analysis

1 Tbps = terabits per second


The biggest online platforms have user bases

on par with the populations of the world’s biggest countries

Active users of online platforms vs. country population, million

650

407

400

321

320

300

300

256

205

India

YouTube

Facebook

1,000

China

WhatsApp

Brazil

Alibaba

WeChat

Instagram

1,372

United States

Twitter

Skype

Amazon

Indonesia

1,590

1,314

1,000

Online platforms1 Countries2

1 4Q15 or latest available

2 2015 population

SOURCE: Facebook; Twitter; Alibaba; Fortune; Statista; Population Reference Bureau; McKinsey Global Institute analysis


Individuals are participating in globalization,

and 914 million have cross-border social media connections

Students

studying abroad

5 million

Cross-border

e-commerce shoppers

361 million

International

travelers

429 million

People living outside

home country

244 million

Cross-border

online students

13 million

Cross-border

online workers

44 million

Social networking users with

at least one foreign connection

914 million

NOTE: Numbers adjusted to account for overlap between platforms and for individuals making multiple international trips in the same year.

SOURCE: Facebook; AliResearch; US Department of Commerce; OECD; World Bank; McKinsey Global Institute analysis


MGI Connectedness Index (1/2)Country connectedness index and overall flows data, 2014

Rank of participation by flow as measured by flow intensity and share of world total

1–10 11–25 26–50 >50Connectedness index rank 100+ <7070–99Flow intensity

Rank Country Score

Connectedness Index rank Flow value1

$ billion

Flow intensity2

% of GDPGoods Services Finance People Data

1 Singapore 64.2 1 2 2 12 6 1,392 452

2 Netherlands 54.3 3 3 6 21 1 1,834 211

3 United States 52.7 7 7 3 1 7 6,832 39

4 Germany 51.9 2 4 8 3 2 3,798 99

5 Ireland 45.9 32 1 1 28 9 559 227

6 United Kingdom 40.8 13 5 5 6 3 2,336 79

7 China 34.2 4 16 4 82 38 6,480 63

8 France 30.1 11 8 9 7 4 2,262 80

9 Belgium 28.0 5 6 33 33 8 1,313 246

10 Saudi Arabia 22.6 20 28 27 2 53 790 106

11 United Arab Emirates 22.2 6 23 17 4 46 789 196

12 Switzerland 18.0 12 11 10 17 13 848 115

13 Canada 17.3 16 22 11 11 18 1,403 79

14 Russia 16.1 21 25 18 5 25 1,059 57

15 Spain 14.4 25 13 19 14 16 1,105 79

16 Korea 14.0 8 12 28 50 44 1,510 107

17 Italy 13.4 17 18 24 16 19 1,587 74

18 Sweden 13.0 29 14 22 31 5 572 100

19 Austria 11.7 26 17 31 20 12 470 108

20 Malaysia 11.6 9 19 25 26 43 610 187

21 Mexico 10.7 14 63 34 18 41 1,022 80

22 Thailand 10.7 10 15 36 44 64 605 162

23 Kuwait 10.6 37 46 13 13 75 306 153

24 Japan 10.5 15 20 12 81 20 2,498 54

25 Kazakhstan 10.0 48 73 41 8 57 176 83

26 Ukraine 9.8 38 39 87 10 34 133 101


1 Flows value represents total goods, services, and financial inflows and outflows.

2 Flow intensity represents the total value of goods, services, and financial flows as a share of the country’s GDP.


MGI Connectedness Index (2/2)Country connectedness index and overall flows data, 2014

Rank of participation by flow as measured by flow intensity and share of world total

1–10 11–25 26–50 >50Connectedness index rank 100+ <7070–99Flow intensity

Rank Country Score

Connectedness Index rank Flow value1

$ billion

Flow intensity2

% of GDPGoods Services Finance People Data

27 Australia 9.7 30 34 21 15 33 825 57

28 Denmark 8.9 35 9 32 41 11 369 108

29 Jordan 8.8 73 50 75 9 83 50 138

30 India 8.5 24 10 35 58 70 1,316 64

32 Czech Republic 7.5 18 33 57 59 15 397 193

34 Poland 7.0 23 31 47 34 22 585 107

35 Hungary 6.8 22 30 26 62 17 287 209

36 Norway 6.0 36 24 20 46 24 458 92

37 Vietnam 5.7 19 54 45 103 61 350 188

39 Finland 5.5 46 27 23 70 10 390 144

40 Portugal 5.5 47 36 30 23 31 255 111

41 Turkey 5.1 28 40 53 38 29 521 65

43 Israel 4.9 51 32 49 24 56 248 82

44 Brazil 4.5 41 38 14 125 30 869 37

45 Chile 4.1 45 58 16 102 27 239 92

47 Greece 4.1 60 29 54 35 42 160 67

48 New Zealand 3.9 67 48 61 25 51 130 63

51 Indonesia 3.4 31 49 38 106 76 504 57

53 South Africa 3.3 34 57 52 64 80 277 79

54 Philippines 3.2 54 41 44 52 67 230 81

64 Morocco 2.6 58 43 74 56 65 104 97

73 Egypt 2.2 68 42 69 73 71 158 55

83 Nigeria 1.9 55 76 48 128 98 268 47

86 Peru 1.8 62 88 51 104 49 122 60

118 Kenya 1.3 100 84 127 119 91 35 58


1 Flows value represents total goods, services, and financial inflows and outflows.

2 Flow intensity represents the total value of goods, services, and financial flows as a share of the country’s GDP.

investment and industrial policy: a perspective on the future · mckinsey & company 6 used...

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